Target Price: Rs3200
TCS delivered better than expected revenue growth in Q3, while margins came a tad below our expectations. Revenue grew 2.9% QoQ to USD7.1bn (2.2% CC) in a seasonally-soft quarter, driven by cloud, ERP and cyber security services as well as market-share gains through vendor consolidation. Continued traction in regional markets (~6% CC QoQ growth for a second quarter in a row; inherently more volatile) largely explains the revenue beat. Deal-closure activity (deal intake TCV of USD7.8bn; book-to-bill at 1.1x) exhibited some moderation due to slower decision-making, although the deal pipeline build-up has remained healthy so far. Management remains watchful in the near term, considering heightened macro uncertainties; however, it reiterated confidence on accelerating revenue growth, once uncertainties abate. We tweak our earnings estimates for FY23-25 (<1% cut) post the Q3 performance and special dividend outgo. TCS is well placed to navigate the challenging demand environment, considering its well-diversified offerings across growth & transformation and cost takeout & efficiency projects; but this seems to be largely captured in the valuation, in our view. We retain HOLD with TP of Rs3,200/share at 22x Dec-24E EPS.
Results summary: Revenue grew 2.9% QoQ to USD7.1bn (2.2%/13.5% QoQ/YoY CC), beating our estimates. EBITM expanded ~50bps QoQ to 24.5% on the back of currency movement (+70bps) and operational rigor (+30bps; includes better utilization, realization, and reduction of external consultants costs), offset by increasing cost of normalcy (back-to-office and travel cost) and higher project-related third-party costs (-50bps). Net Profit stood at Rs108.5bn, lower than our estimate of Rs111.6bn on account of lower other income. Revenue growth was broad-based and led by Retail & CPG (18.7% CC YoY), Life Sciences & Healthcare (14.4%), Technology & Services (13.6%), Communication and Media (13.5%), Manufacturing (12.5%), and BFSI (11.1%). What we liked: Revenue beat, broad-based revenue growth, steady deal intake (TCV of USD7.8bn), dividend of Rs75 per share (incl. Rs67/sh special dividend). What we did not like: Sequential reduction in headcount after 10 quarters (headcount growth moderated to 10.2% YoY vs. 21.2% at the end of Q4FY22).
Earning call KTAs: 1) Cloud, ERP, Modernization & Security, Customer Experience, Connected Services and Managed Security were the themes that drove the growth in Q3. 2) Management expects near term uncertainties amid increased caution by clients in the USA, but is hopeful of return to normalcy in clients’ decision-making in the next few months. UK is showing resilience and is likely to remain steady, partly aided by market-share gain. Europe performance was held up in Q3, but outlook remains uncertain due to the macro situation. 3) Management highlighted that the manufacturing vertical is demonstrating better resilience than expected, but remains watchful considering the macro uncertainties, disruptions from supply-chain and energy prices. 4) It expects the FY23 exit-margin to be at ~25%. 5) Deal TCV for BFSI stood at USD2.5bn, Retail & CPG TCV at USD1.2bn and North America TCV at USD4.2bn in Q3FY23. 6) Headcount declined by 2,197 in Q3 due to focus on efficiency, aggressive hiring in prior quarters, and abating supply-side challenges. It expects the hiring trend to normalize in FY24, with gross hiring plan of 125k-150k. 7) The company added ~7,000 freshers in Q3 (~42,000 fresher addition in 9MFY23). 8) LTM attrition moderated to 21.3% vs 21.5% in Q2 and is likely to further taper down. Management indicated that quarterly annualized attrition moderated by ~6% QoQ.